In a severe sell-off, 99 percent of ALL stocks can fall.
Approximately three out of four stocks go down in a bear market. This ratio doesn't just apply to high beta names; historically, 75 percent of all stocks go down when the general market falls.
Considering we could be headed into a severe bear market (read Bob Prechter's latest special two-issue Elliott Wave Theorist, if you haven't yet), we could see more than 75 percent of stocks take a dive. In that case, even a basket of "defensive" or "quality" names isn't likely to help your portfolio. What good are dividends when you're losing far, far more through capital depreciation?
On May 20, when the DJIA lost 376 points, 497 out of the S&P 500 stocks ended the day lower. (In other words, 99 percent of stocks fell.) Yet a financial television host recommended "defensive" names the day after. Wouldn't his viewers be better served if he said, "You may want to step aside for now"? Apparently, stocks of one kind or another must be recommended -- no matter what the market is doing or is expected to do.
How about "quality" stocks that don't fit the "defensive" category, like blue chips or major technology names? The 1973-1974 bear market provides a clue. The "nifty fifty" stocks were "glamour" stocks; pundits said the "nifty fifty" should "be bought and never sold." However, by the time the bear market bottomed,
- Polaroid cratered 91% (eventually went bankrupt)
- Avon nose-dived 86%
- Xerox fell 71%
- Standard Brands Paint (eventually went bankrupt)
Here's what Prechter said on the matter in his September 2009 Theorist: "When the stock market overall ended its bear market in the fourth quarter of 1974, the nifty fifty had fallen substantially from their highs, and many investors continued to hold them under the belief that they would come roaring back. But they underperformed most other groups of stocks throughout the rest of the 1970s and into the 1980s." [emphasis added]
Similarly, big-name stocks that fell in 2007-2009 have yet to come close to fully recovering. Today's favored stocks could likewise nose-dive.
Learn from the past. Avoid the mistake of holding a defensive or quality stock "all the way down."
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The April-May Theorist series entitled "Deadly Bearish Big Picture" reveals a lucid picture for 2010-2016. It's the flipside of Robert Prechter's February
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